##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from to
 Commission file number 001-16265
 LIME ENERGY CO.
  Delaware
    
    36-4197337(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 1280 Landmeier Road, Elk Grove Village, Illinois 60007-2410
 (847) 437-1666
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
  o o þ
  o þ




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##### 



LIME ENERGY CO.
FORM 10-Q  For The Quarter Ended June 30, 2007
 INDEX
 PageNumberPart I
    
    Financial InformationITEM 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets June 30, 2007 (unaudited) and December 31, 2006
    
    
    1Condensed Consolidated Statement of Operations Three Months Ended June 30, 2007 and 2006 (unaudited)
    
    
    3Condensed Consolidated Statement of Operations Six Months Ended June 30, 2007 and 2006 (unaudited)
    
    
    4Condensed Consolidated Statement of Stockholders Equity Six Months Ended June 30, 2007 (unaudited)
    
    
    5Condensed Consolidated Statement of Cash Flows Six Months Ended June 30, 2007 and 2006 (unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    8ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    29ITEM 4.
    
    Controls and Procedures
    
    
    29Part II.
    
    Other Information:ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    31ITEM 6.
    
    Exhibits
    
    
    32Signatures
    
    
    33302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer




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LIME ENERGY CO.
 
 CONDENSED CONSOLIDATED BALANCE SHEET
 June 30,2007
    
    
    December 31,(unaudited)
    
    
    2006(1)AssetsCurrent AssetsCash and cash equivalents
    
    $
    8,340,281
    
    
    $
    4,663,618Accounts receivable, net
    
    
    3,800,146
    
    
    
    2,825,947Inventories
    
    
    1,114,221
    
    
    
    614,491Advances to suppliers
    
    
    106,583
    
    
    
    132,083Costs and estimated earnings in
excess of billings on
uncompleted contracts
    
    
    411,795
    
    
    
    Prepaid expenses and other
    
    
    345,904
    
    
    
    279,017Total Current Assets
    
    
    14,118,930
    
    
    
    8,515,156Net Property and Equipment
    
    
    1,257,726
    
    
    
    1,201,008Long Term Receivables
    
    
    92,336
    
    
    
    102,904Deferred Financing Costs, net
    
    
    8,322
    
    
    
    Intangibles, net
    
    
    4,684,000
    
    
    
    5,126,829Cost in Excess of Assets Acquired
    
    
    10,499,519
    
    
    
    10,450,968$
    30,660,833
    
    
    $
    25,396,865
 1




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##### Table of Contents



LIME ENERGY CO.
CONDENSED CONSOLIDATED BALANCE SHEET
 June 30,2007
    
    
    December 31,(unaudited)
    
    
    2006(1)Liabilities and Stockholders EquityCurrent LiabilitiesAccounts payable
    
    $
    1,727,779
    
    
    $
    1,344,725Current maturities of long-term debt
    
    
    523,350
    
    
    
    46,699Accrued expenses
    
    
    919,694
    
    
    
    1,251,777Notes payable
    
    
    150,000
    
    
    
    150,000Deferred revenue
    
    
    1,209,369
    
    
    
    967,446Customer deposits
    
    
    1,282,834
    
    
    
    1,148,090Total Current Liabilities
    
    
    5,813,026
    
    
    
    4,908,737Deferred Revenue
    
    
    541,416
    
    
    
    748,980Long-Term Debt, less current
maturities, net of unamortized discount
of $2,915,553 and $0 at June 30, 2007 and
December 31, 2006, respectively
    
    
    2,135,968
    
    
    
    520,392Deferred Tax Liability
    
    
    1,034,000
    
    
    
    1,034,000Total Liabilities
    
    
    9,524,410
    
    
    
    7,212,109Stockholders EquityCommon stock, $.0001 par value;
200,000,000 shares authorized,
53,641,699 and 49,786,611 issued as
of June 30, 2007 and December 31,
2006, respectively
    
    
    5,364
    
    
    
    4,979Additional paid-in capital
    
    
    103,331,686
    
    
    
    95,025,912Accumulated deficit
    
    
    (82,200,627
    )
    
    
    (76,846,135
    )Total Stockholders Equity
    
    
    21,136,423
    
    
    
    18,184,756$
    30,660,833
    
    
    $
    25,396,865
 See accompanying notes to condensed consolidated financial statements
 (1)
    
    Derived from audited financial statements in the Companys annual
report on Form 10-K for the year ended December 31, 2006
 2




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##### Table of Contents



LIME ENERGY CO.
 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 (Unaudited)
 Three months ended June 30
    
    2007
    
    
    2006Revenue
    
    $
    4,102,693
    
    
    $
    1,334,818Cost of sales
    
    
    2,944,724
    
    
    
    973,481Gross profit
    
    
    1,157,969
    
    
    
    361,337Selling, general and administrative
    
    
    2,647,873
    
    
    
    1,911,162Amortization of intangibles
    
    
    482,020
    
    
    
    146,095Operating loss
    
    
    (1,971,924
    )
    
    
    (1,695,920
    )Other Expense:Interest income
    
    
    74,222
    
    
    
    8,058Interest expense
    
    
    (145,851
    )
    
    
    (2,971,956
    )Total other expense
    
    
    (71,629
    )
    
    
    (2,963,898
    )Net Loss
    
    
    (2,043,553
    )
    
    
    (4,659,818
    )Plus preferred stock dividends
    
    
    
    
    
    
    (23,732,435
    )Net Loss Available to Common Shareholders
    
    $
    (2,043,553
    )
    
    $
    (28,392,253
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (0.04
    )
    
    $
    (6.49
    )Weighted average common shares outstanding
    
    
    53,428,595
    
    
    
    4,373,236
 See accompanying notes to condensed consolidated financial statements
 3




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##### Table of Contents



LIME ENERGY CO.
 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 (Unaudited)
 Six months ended June 30
    
    2007
    
    
    2006Revenue
    
    $
    6,631,240
    
    
    $
    2,481,163Cost of sales
    
    
    5,101,204
    
    
    
    1,881,883Gross profit
    
    
    1,530,036
    
    
    
    599,280Selling, general and administrative
    
    
    5,903,785
    
    
    
    3,660,165Amortization of intangibles
    
    
    938,829
    
    
    
    323,007Operating loss
    
    
    (5,312,578
    )
    
    
    (3,383,892
    )Other Expense:Interest income
    
    
    120,335
    
    
    
    28,769Interest expense
    
    
    (162,249
    )
    
    
    (3,239,875
    )Total other expense
    
    
    (41,914
    )
    
    
    (3,211,106
    )Loss from continuing operations
    
    
    (5,354,492
    )
    
    
    (6,594,998
    )Loss from discontinued operations
    
    
    
    
    
    
    (21,425
    )Net Loss
    
    
    (5,354,492
    )
    
    
    (6,616,423
    )Plus preferred stock dividends
    
    
    
    
    
    
    (24,347,725
    )Net Loss Available to Common Shareholders
    
    $
    (5,354,492
    )
    
    $
    (30,964,148
    )Basic and diluted loss per common share from
continuing operations
    
    $
    (0.10
    )
    
    $
    (7.94
    )Discontinued operations
    
    
    
    
    
    
    (0.01
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (0.10
    )
    
    $
    (7.95
    )Weighted average common shares outstanding
    
    
    51,826,534
    
    
    
    3,894,505
 See accompanying notes to condensed consolidated financial statements
 4




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##### Table of Contents



LIME ENERGY CO.
 
 STATEMENT OF CONDENSED CONSOLIDATED STOCKHOLDERS EQUITY
 (Unaudited)
 Additional
    
    
    
    
    
    
    TotalCommon
    
    
    Common
    
    
    Paid-in
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance,December 31, 2006
    
    
    49,786,611
    
    
    $
    4,979
    
    
    $
    95,025,912
    
    
    $
    (76,846,135
    )
    
    $
    18,184,756Issuance of common stock (less issuance costs)
    
    
    2,999,632
    
    
    
    300
    
    
    
    2,796,400
    
    
    
    
    
    
    
    2,796,700Offering costs for 2006 issuance of common stock
    
    
    
    
    
    
    
    
    
    
    (45,361
    )
    
    
    
    
    
    
    (45,361
    )Acquisition of Texas Energy Products, Inc.
    
    
    200,000
    
    
    
    20
    
    
    
    213,980
    
    
    
    
    
    
    
    214,000Release of escrow shares to former owners of Maximum Performance Group, Inc.
    
    
    20,715
    
    
    
    2
    
    
    
    26,306
    
    
    
    
    
    
    
    26,308Satisfaction of liquidated damages through the issuance of common stock
    
    
    613,708
    
    
    
    61
    
    
    
    613,647
    
    
    
    
    
    
    
    613,708Share based compensation
    
    
    
    
    
    
    
    
    
    
    1,488,116
    
    
    
    
    
    
    
    1,488,116Warrants issued in connection with Subordinated Convertible Notes
    
    
    
    
    
    
    
    
    
    
    1,136,537
    
    
    
    
    
    
    
    1,136,537Value of beneficial conversion feature on Subordinated Convertible Notes
    
    
    
    
    
    
    
    
    
    
    1,866,537
    
    
    
    
    
    
    
    1,866,537Satisfaction of interest obligation through issuance of common stock
    
    
    10,955
    
    
    
    1
    
    
    
    20,814
    
    
    
    
    
    
    
    20,815Warrants issued for services received
    
    
    
    
    
    
    
    
    
    
    162,000
    
    
    
    
    
    
    
    162,000Exercise of warrants
    
    
    10,078
    
    
    
    1
    
    
    
    7,594
    
    
    
    
    
    
    
    7,595Warrant repricing
    
    
    
    
    
    
    
    
    
    
    19,204
    
    
    
    
    
    
    
    19,204Net loss for the six months ended June 30, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,354,492
    )
    
    
    (5,354,492
    )Balance,June 30, 2007
    
    
    53,641,699
    
    
    $
    5,364
    
    
    $
    103,331,686
    
    
    $
    (82,200,627
    )
    
    $
    21,136,423
 See accompanying notes to condensed consolidated financial statements.
 5




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##### Table of Contents



LIME ENERGY CO.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Six months ended June 30
    
    2007
    
    
    2006Cash Flow from Operating ActivitiesNet loss
    
    $
    (5,354,492
    )
    
    $
    (6,616,423
    )Adjustments to reconcile net loss to net cash used in
operating activities, net of acquisitions and dispositionsDepreciation and amortization
    
    
    1,007,629
    
    
    
    406,532Share based compensation
    
    
    1,488,116
    
    
    
    246,869Warrants issued in exchange for services received
    
    
    162,000
    
    
    
    Provision for bad debt
    
    
    3,246
    
    
    
    Provision for inventory obsolescence
    
    
    47,781
    
    
    
    Liquidated damages satisfied through issuance of common stock
    
    
    613,708
    
    
    
    185,260Amortization of deferred financing costs
    
    
    250
    
    
    
    299,964Amortization of original issue discount
    
    
    87,521
    
    
    
    898,409Accrued interest satisfied through the issuance of common stock
    
    
    20,815
    
    
    
    Warrant repricing
    
    
    19,204
    
    
    
    Termination of post repayment interest and interest
converted to common stock
    
    
    
    
    
    
    274,747Beneficial value of revolver adjustment in conversion price
    
    
    
    
    
    
    950,865Loss on disposal of fixed assets
    
    
    
    
    
    
    93,861Changes in assets and liabilities, net of acquisitions
and dispositionsAccounts receivable
    
    
    (888,467
    )
    
    
    (23,869
    )Inventories
    
    
    (479,877
    )
    
    
    164,418Advances to suppliers
    
    
    25,500
    
    
    
    115,758Other current assets
    
    
    (473,882
    )
    
    
    (30,197
    )Accounts payable
    
    
    281,698
    
    
    
    178,822
    )Accrued expenses
    
    
    (351,324
    )
    
    
    (2,513
    )Deferred revenue
    
    
    (1,425
    )
    
    
    201,499Other current liabilities
    
    
    134,744
    
    
    
    (100,346
    )Net cash used in operating activities
    
    
    (3,657,255
    )
    
    
    (2,756,344
    )Cash Flows Used In Investing ActivitiesAcquisitions (including acquisition costs), net of cash acquired
    
    
    (305,706
    )
    
    
    (2,849,762
    )Sale of discontinued operations
    
    
    
    
    
    
    (83,586
    )Purchase of property and equipment
    
    
    (118,518
    )
    
    
    (12,544
    )Net cash used in investing activities
    
    
    (424,224
    )
    
    
    (2,945,892
    )Cash Flows Provided by Financing Activities(Payments) borrowings on lines of credit
    
    
    
    
    
    
    (1,456,545
    )Proceeds from long-term debt
    
    
    5,033,228
    
    
    
    Payment on long-term debt
    
    
    (25,448
    )
    
    
    (5,325,861
    )Cash paid for deferred financing costs
    
    
    (8,572
    )
    
    
    Proceeds from issuance of common stock
    
    
    2,999,632
    
    
    
    17,875,000Issuance costs related to stock issuances
    
    
    (248,293
    )
    
    
    (90,079
    )Proceeds from exercise of warrants
    
    
    7,595
    
    
    
    Net cash provided by financing activities
    
    
    7,758,142
    
    
    
    11,002,515Net Increase in Cash and Cash Equivalents
    
    
    3,676,663
    
    
    
    5,300,279Cash and Cash Equivalents, at beginning of period
    
    
    4,663,618
    
    
    
    4,229,150Cash and Cash Equivalents, at end of period
    
    $
    8,340,281
    
    
    $
    9,529,429Supplemental Disclosure of Cash Flow InformationCash paid during the periods for interest  continuing operations
    
    $
    12,219
    
    
    $
    370,927Cash paid during the periods for interest  discontinued operations
    
    
    
    
    
    
    42Value of warrants issued in exchange for services received
    
    $
    162,000
    
    
    $
    
 6




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##### Table of Contents



Supplemental Disclosures of Noncash Investing and Financing Activities:
  Cash
    
    $
    17,899Accounts receivable
    
    
    78,410Inventory
    
    
    67,634Other current assets
    
    
    4,800Property and equipment
    
    
    7,000Identifiable intangible assets
    
    
    496,000Cost in excess of assets acquired
    
    
    22,243Total assets acquired
    
    
    693,986Accounts payable
    
    
    (101,356
    )Accrued expenses
    
    
    (19,241
    )Other current liabilities
    
    
    (35,784
    )Total liabilities assumed
    
    
    (156,381
    )Net assets acquired
    
    
    537,605Less valuation of shares issued for acquisition
    
    
    (214,000
    )Acquisition costs
    
    
    (10,818
    )Total cash paid
    
    $
    312,787
 See accompanying notes to condensed consolidated financial statements
 7




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##### Table of Contents



Lime Energy Co.
 
 Notes to Condensed Consolidated Financial Statements
 Note 1  Basis of Presentation
    Note 2  Stock-based Compensation
   Three Months Ended
    
    Six Months EndedJune 30
    
    June 302007
    
    2006
    
    2007
    
    2006Weighted average fair value
per option granted
    
    $
    0.75
    
    
    $
    0.77
    
    
    $
    0.73
    
    
    $
    1.02Significant assumptions
(weighted average):Risk-free rate
    
    
    4.90
    %
    
    
    5.06
    %
    
    
    5.01
    %
    
    
    5.03
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Expected volatility
    
    
    88.2
    %
    
    
    92.1
    %
    
    
    89.0
    %
    
    
    91.3
    %Expected life (years)
    
    
    5.8
    
    
    
    5.7
    
    
    
    5.5
    
    
    
    5.6
  8




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  WeightedExercise
    
    
    AveragePrice Per
    
    
    ExerciseShares
    
    
    Share
    
    
    PriceOutstanding at March 31, 2007
    
    
    11,022,466
    
    
    $
    0.90-$194.85
    
    
    $
    4.01Granted
    
    
    335,000
    
    
    $
    0.90-$1.80
    
    
    $
    1.10Forfeited
    
    
    (61,833
    )
    
    $
    0.90-$35.40
    
    
    $
    5.02Outstanding at June 30, 2007
    
    
    11,295,633
    
    
    $
    0.90-$194.85
    
    
    $
    3.92Options exercisable at June 30, 2007
    
    
    5,002,679
    
    
    $
    0.90-$194.85
    
    
    $
    7.56
  WeightedExercise
    
    
    AveragePrice Per
    
    
    ExerciseShares
    
    
    Share
    
    
    PriceOutstanding at December 31, 2006
    
    
    10,707,132
    
    
    $
    0.96-$194.85
    
    
    $
    4.13Granted
    
    
    685,000
    
    
    $
    0.90-$1.80
    
    
    $
    1.02Forfeited
    
    
    (96,499
    )
    
    $
    1.02-$30.75
    
    
    $
    6.33Outstanding at June 30, 2007
    
    
    11,295,633
    
    
    $
    0.90-$194.85
    
    
    $
    3.92Options exercisable at June 30, 2007
    
    
    5,002,679
    
    
    $
    0.90-$194.85
    
    
    $
    7.56
  Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    Remaining
    
    
    Average
    
    
    Number
    
    
    AverageOutstanding at
    
    
    Contractual
    
    
    Exercise
    
    
    Exercisable at
    
    
    ExerciseExercise Price
    
    June 30, 2007
    
    
    Life
    
    
    Price
    
    
    June 30, 2007
    
    
    Price$0.90 - $1.00
    
    
    3,865,000
    
    
    9.1 years
    
    $
    0.96
    
    
    
    319,000
    
    
    $
    0.96$1.01 - $1.10
    
    
    6,507,500
    
    
    9.1 years
    
    
    1.02
    
    
    
    3,912,209
    
    
    
    1.02$1.11 - $10.00
    
    
    235,000
    
    
    9.4 years
    
    
    4.67
    
    
    
    100,000
    
    
    
    9.30$10.01 - $194.85
    
    
    688,133
    
    
    2.9 years
    
    
    47.70
    
    
    
    671,470
    
    
    
    48.5111,295,633
    
    
    8.7 years
    
    $
    3.92
    
    
    
    5,002,679
    
    
    $
    7.56
 9




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
   Note 3  Acquisition of Texas Energy Products
     Cash
    
    $
    17,899Accounts receivable
    
    
    78,410Inventory
    
    
    67,634Other current assets
    
    
    4,800Property and equipment
    
    
    7,000Identifiable intangible assets
    
    
    496,000Goodwill
    
    $
    22,243Accounts payable
    
    $
    101,356Accrued expenses
    
    
    19,241Other current liabilities
    
    $
    35,784
  10




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Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  Estimated
    
    EstimatedAsset Class
    
    Value
    
    Useful LifeSales backlog
    
    $
    223,000
    
    
    3 MonthsSales pipeline
    
    
    273,000
    
    
    6 Months
  Note 4  Recent Accounting Pronouncements
     The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115
 11




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Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  Fair Value Measurements
 Note 5  Cost in Excess of Assets Acquired
  Energy
    
    EnergyTechnology
    
    Services
    
    TotalBalance at December 31, 2006
    
    $
    4,155,661
    
    
    $
    6,295,307
    
    
    $
    10,450,968Release of escrow shares
    
    
    26,308
    
    
    
    
    
    
    
    26,308Acquisition of Texas Energy
Products
    
    
    
    
    
    
    22,243
    
    
    
    22,243Balance at June 30, 2007
    
    $
    4,181,969
    
    
    $
    6,317,550
    
    
    $
    10,499,519
  Note 6  Net Loss Per Share
  12




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  Three Months Ended
    
    Six months EndedJune 30
    
    June 302007
    
    2006
    
    2007
    
    2006Weighted average
shares issuable
upon exercise of
outstanding options
    
    
    11,148,255
    
    
    
    867,618
    
    
    
    11,078,283
    
    
    
    853,003Weighted average
shares issuable
upon exercise of
outstanding
warrants
    
    
    1,997,618
    
    
    
    1,073,869
    
    
    
    1,705,160
    
    
    
    1,075,968Weighted average
shares issuable
upon conversion of
preferred
stock(1)
    
    
    
    
    
    
    1,516,671
    
    
    
    
    
    
    
    1,533,889Weighted average
shares issuable
upon conversion of
convertible debt
    
    
    1,662,088
    
    
    
    338,860
    
    
    
    835,635
    
    
    
    356,740Total
    
    
    14,807,961
    
    
    
    3,797,018
    
    
    
    13,619,078
    
    
    
    3,819,600
 (1)
    
    All of the outstanding shares of convertible preferred stock were converted to common stock on June 29, 2006.
  Note 7  Warranty Obligations
  13




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Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  Three Months Ended
    
    Six Months EndedJune 30
    
    June 302007
    
    2006
    
    2007
    
    2006Balance, beginning of period
    
    $
    199,075
    
    
    $
    188,254
    
    
    $
    196,783
    
    
    $
    208,300Warranties issued
    
    
    9,674
    
    
    
    15,750
    
    
    
    21,823
    
    
    
    29,250Settlements
    
    
    
    
    
    
    (11,423
    )
    
    
    (9,857
    )
    
    
    (44,969
    )Balance, as of June 30
    
    $
    208,749
    
    
    $
    192,581
    
    
    $
    208,749
    
    
    $
    192,581
 Note 8  Inventories
  June 30,
    
    December 31,2007
    
    2006Raw materials
    
    $
    1,563,507
    
    
    $
    1,010,995Work in process
    
    
    
    
    
    
    3,700Finished goods
    
    
    167,162
    
    
    
    196,586Reserve for obsolescence (1)
    
    
    (616,448
    )
    
    
    (596,790
    )$
    1,114,221
    
    
    $
    614,491
 (1)
    
    Includes $553,909 reserve for obsolete EnergySaver inventory
 14




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 Note 9  Dividends
  Three Months Ended
    
    Six Months EndedJune 30
    
    June 302007
    
    2006
    
    2007
    
    2006Accrual of dividend
on Series E
Convertible
Preferred
    
    $
    
    
    
    $
    349,100
    
    
    $
    
    
    
    $
    698,000Deemed dividend
associated with
change in
conversion price of
the Series E
Convertible
Preferred
Stock(1)
    
    
    
    
    
    
    23,085,467
    
    
    
    
    
    
    
    23,085,467Deemed dividend
associated with
change in exercise
price of warrants
issued to the
preferred investors
    
    
    
    
    
    
    297,868
    
    
    
    
    
    
    
    564,258Total
    
    $
    
    
    
    $
    23,732,435
    
    
    $
    
    
    
    $
    24,347,725
 (1)
    
    The holders of the Companys Series E convertible preferred stock converted all of
their shares of preferred stock into common stock on June 29, 2006.
 Note 10  Subordinated Convertible Term Note
   15




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
   Value Allocated to Term Notes:Proceeds from issuance
    
    $
    5,000,000Less value allocated to warrants
    
    
    (1,136,537
    )Value allocated to Term Notes
    
    $
    3,863,463
 Market Value of Shares Issuable Upon Conversion:Shares issuable upon conversion of the Term Notes
    
    
    5,000,000Closing market value of stock on term note issuance date
    
    $
    1.15Market value of shares issuable upon conversion
    
    
    5,730,000
 Beneficial Conversion Value:Market value of shares issuable upon conversion
    
    $
    5,730,000Less value allocated to Term Notes
    
    
    (3,863,463
    )Value of beneficial conversion feature
    
    $
    1,866,537
   16




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Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 Note 11  Business Segment Information
      17




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Energy Technology
    
    $
    1,019,304
    
    
    $
    1,334,818
    
    
    $
    1,865,804
    
    
    $
    2,481,163Energy Services
    
    
    3,083,389
    
    
    
    
    
    
    
    4,788,232
    
    
    
    Intercompany sales
    
    
    
    
    
    
    
    
    
    
    (22,796
    )
    
    
    Total
    
    
    4,102,693
    
    
    
    1,334,818
    
    
    
    6,631,240
    
    
    
    2,481,163Operating Loss:Energy Technology
    
    
    (578,993
    )
    
    
    (889,603
    )
    
    
    (1,394,932
    )
    
    
    (1,882,344
    )Energy Services
    
    
    (226,494
    )
    
    
    
    
    
    
    (933,471
    )
    
    
    Corporate overhead
    
    
    (1,166,437
    )
    
    
    (806,317
    )
    
    
    (2,984,175
    )
    
    
    (1,501,548
    )Total
    
    
    (1,971,924
    )
    
    
    (1,695,920
    )
    
    
    (5,312,578
    )
    
    
    (3,383,892
    )Interest Expense, net
    
    
    (71,629
    )
    
    
    (2,963,898
    )
    
    
    (41,914
    )
    
    
    (3,211,106
    )Net Loss From
Continuing Operations
    
    $
    (2,043,553
    )
    
    $
    (4,659,818
    )
    
    $
    (5,354,492
    )
    
    $
    (6,594,998
    )
 June 30,
    
    
    December 31,2007
    
    
    2006Total Assets:Energy Technology
    
    $
    7,261,199
    
    
    $
    7,409,969Energy Services
    
    
    13,916,497
    
    
    
    12,490,617Corporate overhead
    
    
    9,483,137
    
    
    
    5,496,279Total
    
    $
    30,660,833
    
    
    $
    25,396,865
 Note 12  Equity Issuances
 a)
    
    During January 2007, the Company issued consultants warrants with terms of two to three years
to purchase 420,000 shares of its common stock at prices of $1.00 to $1.08 per share as
partial consideration for services provided the Company. These warrants were initially valued
at $250,500 using a modified Black-Scholes option pricing model utilizing the following
assumptions: risk free rate of 5.129%, expected volatility of 88.9%, expected dividend of $0
and expected life of two to three years. One of these warrants was exercisable only if
certain objectives were achieved by the consultant prior to August 1, 2007. The value of
theses warrants were charged to operations during the first quarter of 2007. During second
quarter of 2007 the Company determined the consultant was
unlikely to meet the objective necessary for the warrant to vest, therefore it reversed $88,500
of expense it had previously recorded in connection with this warrant.
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Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 b)
    
    A provision of the June 2006 PIPE transaction required the Company to file and have declared
effective by no later than November 3, 2006, a registration statement registering the shares
issued as part of the transaction. To the extent that it failed to have the registration
statement declared effective by this date, it was required to pay penalties to the PIPE
investors at the rate of 1% of the purchase price paid by the investors per month. Largely as
a result of the questions regarding the need to amend its Certificate of Incorporation to
effect the reverse split of its stock, the Company was not able to have the registration
statement declared effective until February 14, 2007. All of the investors in the PIPE
transaction agreed to accept shares of the Companys common stock as payment of this
registration penalty. As of December 31, 2006, the Company had accrued $345,583 in penalties
related to its failure to register these shares. These accrued penalties, along with $268,125
of penalties for the period from January 1, 2007 through February 14, 2007, were satisfied
through the issuance of 613,708 shares of common stock in January and February 2007.c)
    
    On February 23, 2007, the Company commenced a rights offering to stockholders in which it
distributed to each holder of record as of February 23, 2007 (other than the former Series E
Preferred stockholders and Daniel Parke, who waived their rights to participate), five
non-transferable subscription rights to purchase shares of the Companys common stock at $1.00
per share. Stockholders that participated in the rights offering were also able to subscribe
for any shares that were not purchased by other stockholders pursuant to their subscription
rights. The rights offering closed on March 30, 2007 and raised a total of $2,999,632 through
the issuance of 2,999,632 shares of common stock to 260 of the Companys existing
stockholders. The Company received the proceeds from the offering and issued the common stock
to the participants during the first week of April 2007.d)
    
    In connection with the placement of the subordinated convertible term notes during the second
quarter of 2007 (see Note 10) the Company issued four-year warrants to eight investors,
including Richard Kiphart, the Companys chairman and largest individual stockholder, to
purchase 1,442,306 shares of its common stock at $1.04 per share. These warrants were valued
at $1,136,537 using a modified-Black Scholes option pricing model utilizing the following
assumptions: risk free rate of 4.846%, expected volatility of 93.3%, expected dividend of $0
and expected life of four years. The value of the warrants was recorded as a discount to the
subordinated convertible term notes and will be amortized over the life of the notes using the
effective interest method.e)
    
    During the second quarter of 2007 five investors exercised their warrants to purchase 10,078
shares of the Companys common stock at $0.90 per share.f)
    
    As discussed in Note 5 to the Companys annual report on Form 10-K for the year ended
December 31, 2006, as part of the MPG acquisition, 166,148 shares of common stock were
deposited in escrow for the benefit of the selling stockholders of MPG to be released over the
two year period following the April 30, 2005 purchase of MPG if it achieved certain revenue
targets during the period. During May 2007 the Company issued 19,729 shares to the former
MPG stockholders which it determined it owed them pursuant to the MPG merger agreement. These
shares were valued at $1.27 per share, the market value on the date of their release, and
recorded as an increase in the goodwill associated with
the MPG acquisition. The remaining 146,419 shares that were in escrow were returned to the
Company and canceled.
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Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 g)
    
    Delano Group Securities LLC acted as an advisor on the acquisition of MPG in 2005. Part of
Delanos compensation for its services was tied to the purchase price paid for MPG. Mr. David
Asplund owned and operated Delano prior to joining Lime Energy as its CEO in January 2006.
Since the release of the escrow shares was considered a payment of additional consideration to
the former stockholders of MPG, the Company issued Mr. Asplund 986 shares of its common stock
in May 2007 in satisfaction of the commission owed Delano.h)
    
    On June 6, 2007, retroactive to May 31, 2007, the Company acquired the assets and assumed
certain liabilities of George Bradley Boyett dba Texas Energy Products. The purchase
consideration consisted of 200,000 shares of Lime Energy common stock and cash of $312,787.
Please refer to Note 3 for additional information regarding this transaction.i)
    
    On June 30, 2007, the Company issued 10,955 shares of its common stock to the holders of its
subordinated convertible term notes in satisfaction of 50% of the interest owed on the note.
Please refer to Note 10 for additional information regarding this note.
 Note 13  Related Party Transactions
   Note 16  Subsequent Event
  20




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  Overview
  Results of Operations
    21




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
    
    direct labor and commission costs related to our employee sales force;
    
    expenses related to our management and staff salaries and related employee benefits,
including the costs of share based compensation;
    
    commission costs related to our independent sales representatives and our distributors;
    
    costs related to insurance, travel and entertainment and office supplies and utilities;
    
    costs related to marketing and advertising our products;
    
    legal and accounting expenses;
    
    research and development expenses; and
    
    costs related to administrative functions that serve to support the existing
businesses of the Company, as well as to provide the infrastructure for future growth.
  Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006.
   22




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Three months ended June 30
    
    2007
    
    2006Contractual interest
    
    $
    58,080
    
    
    $
    164,181Amortization of deferred issuance costs
and debt discount
    
    
    87,771
    
    
    
    1,074,614Value of adjustment in conversion price
    
    
    
    
    
    
    950,865Prepayment penalties
    
    
    
    
    
    
    516,071Termination of post-repayment interest
Obligation
    
    
    
    
    
    
    266,225Total Interest Expense
    
    $
    145,851
    
    
    $
    2,971,956
   23




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Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006.
    24




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##### Table of Contents



Six months ended
    
    2007
    
    2006Contractual interest
    
    $
    74,478
    
    
    $
    330,744Amortization of deferred issuance costs
and debt discount
    
    
    87,771
    
    
    
    1,175,970Value of adjustment in conversion price
    
    
    
    
    
    
    950,865Prepayment penalties
    
    
    
    
    
    
    516,071Termination of post re-payment interest
obligation
    
    
    
    
    
    
    266,225Total Interest Expense
    
    $
    162,249
    
    
    $
    3,239,875
    25




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##### Table of Contents



Liquidity and Capital Resources
    Six months ended June 30
    
    2007
    
    
    2006Net cash used in operating activities
    
    $
    (3,657,255
    )
    
    $
    (2,756,344
    )Net cash used in investing activities
    
    
    (424,224
    )
    
    
    (2,945,892
    )Net cash provided by financing activities
    
    
    7,758,142
    
    
    
    11,002,515Net increase in cash and cash equivalents
    
    
    3,676,663
    
    
    
    5,300,279Cash and cash equivalents, at beginning of period
    
    
    4,663,618
    
    
    
    4,229,150Cash and cash equivalents, at end of period
    
    $
    8,340,281
    
    
    $
    9,529,429
 Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006.
  Operating Activities
   26




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Investing Activities
  Financing Activities
   LIQUIDITY
    27




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##### Table of Contents




    
    Focus on increasing the profitable sales of our products and services. We
believe that we have taken important steps toward achieving this goal during the last
twelve months and are starting to see the results of these efforts. During the first half
of 2007 we increased our sales by 167% when compared to the first half of 2006. At the
same time our operating loss declined by approximately 60% and the cash used to fund the
operating loss before change in working capital declined 41%. Our growth in revenue has
come through acquisitions and the expansion of new and existing businesses. We believe
that the current infrastructure can support annual sales of $25 million to $30 million
without adding significant additional SG&A expense. If we can do this we believe we will
significantly reduce or eliminate the cash consumed for operating activities before changes
in working capital.
    
    Expand our sales through internal product development, acquisitions and/or opening
new offices. We believe there are opportunities for further growth through geographic
and product line expansion. We can expand geographically by opening new offices, hiring
additional sales people and/or by acquiring established businesses in regions of the
country we do not currently serve. We can add to our product line through internal product
development, partnerships, joint ventures, licensing agreements and/or by acquiring
business with products, services and/or expertise that we do not currently have. An
expanded product line would allow us to offer additional energy solutions to our customers,
thereby increasing the value of each customer relationship.
    
    Aggressively manage our costs in order to conserve cash. The prudent use of the
capital resources available to us remains one of our top priorities. We are constantly
reviewing our operations to identify more efficient ways to achieve our objectives.
   Cautionary Note Regarding Forward-Looking Statements
  28




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Quantitative and Qualitative Disclosures About Market Risk
 1 2
 
 Controls and Procedures
 a.
    
    Disclosure Controls and Procedures.Our management, including our chief executive officer and our chief financial officer,
maintains our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) and
has evaluated the effectiveness of our disclosure controls and procedures as of the end of
the period covered by this report. Based on such evaluation, our chief executive officer
and chief financial officer have concluded that, as of June 30, 2007, such disclosure
controls and procedures are effective for the purpose of ensuring that material information
required to be in the reports that we submit, file, furnish or otherwise provide to the
Securities and Exchange Commission is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure.b.
    
    Changes in Internal Controls.There have not been any changes in our internal control over financial reporting (as defined
in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2007 that have
materially affected or are reasonably likely to materially affect our internal control over
financial reporting.
 29




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Unregistered Sales of Equity Securities and Use of Proceeds
 (1)
    
    On February 23, 2007, we commenced a rights offering to stockholders in which we
distributed to each holder of record as of February 23, 2007 (other than the former Series
E Preferred stockholders and Daniel Parke, who waived their rights to participate), five
non-transferable subscription rights to purchase shares of our common stock at $1.00 per
share. Stockholders that participated in the rights offering were also able to subscribe
for any shares that were not purchased by other stockholders pursuant to their subscription
rights. The rights offering closed on March 30, 2007 and raised a total of $2,999,632
through the issuance of 2,999,632 shares of common stock to 260 of our existing
stockholders. We received the proceeds from the offering and issued the common stock to
the participants during the first week of April 2007. The proceeds from the offering will
be used for general purposes and to fund acquisitions.(2)
    
    During the second quarter of 2007 in connection with the placement of the subordinated
convertible term notes (see Note 10 to our condensed consolidated financial statements) we
issued four-year warrants to eight investors, including Richard Kiphart, our chairman and
largest individual stockholder, to purchase 1,442,306 shares of our common stock at $1.04
per share. These warrants were valued at $1,136,537 using a modified-Black Scholes option
pricing model utilizing the following assumptions: risk free rate of 4.846%, expected
volatility of 93.3%, expected dividend of $0 and expected life of four years. The value of
the warrants was recorded as a discount to the subordinated convertible term notes and will
be amortized over the life of the notes using the effective interest method. If these
warrants are exercised for cash, the proceeds will be used for general corporate purposes.(3)
    
    During the second quarter of 2007 five investors exercised their warrants to purchase
10,078 shares of our common stock at $0.90 per share. The proceeds of $7,595 will be used
for general corporate purposes.(4)
    
    As discussed in Note 5 to our annual report on Form 10-K for the year ended December
31, 2006, as part of the acquisition of MPG 166,148 shares of common stock were deposited
in escrow for the benefit of the selling stockholders of MPG to be released over the two
year period following the April 30, 2005 purchase of MPG if MPG achieved certain revenue
targets during the period. During May 2007 we issued 19,729 shares to the former MPG
stockholders which we determined we owed them pursuant to the MPG merger agreement. These
 shares were valued at $1.27 per share, the market value on the date of their release, and
recorded as an increase in the goodwill associated with the MPG acquisition. The remaining
146,419 shares that were in escrow were returned to us and canceled.(5)
    
    Delano Group Securities LLC acted as an advisor on the acquisition of MPG in 2005 and
part of the compensation for its services was tied to the purchase price paid for MPG.
Delano was formerly owned by David Asplund. Mr. Asplund left Delano and became the CEO of
Lime Energy on January 23, 2006. In connection with the release of the escrow shares to
the former stockholders of MPG we issued Mr. Asplund 986 shares of our common stock in May
2007 in satisfaction of the commission owed Delano.
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##### Table of Contents



(6)
    
    On June 6, 2007, we acquired, retroactive to May 31, 2007, the assets and assumed certain
liabilities of George Bradley Boyett dba Texas Energy Products. The purchase consideration
consisted of 200,000 shares of our common stock and cash of $312,787. Please refer to Note
3 to our condensed consolidated financial statements for additional information regarding
this transaction.(7)
    
    On June 30, 2007, we issued 10,955 shares of our common stock to the holders of our
subordinated convertible term notes in satisfaction of 50% of the interest owed on the
note. Please refer to Note 10 to our condensed consolidated financial statements for
additional information regarding this note.No underwriters were involved in the transaction described above. All of the securities
issued in this transaction were issued by us in reliance upon the exemption from
registration available under Section 4(2) of the Securities Act, including Regulation D
promulgated thereunder, in that the transactions involved the issuance and sale of our
securities to financially sophisticated individuals or entities that were aware of our
activities and business and financial condition and took the securities for investment
purposes and understood the ramifications of their actions. Certain of the purchasers also
represented that they were accredited investors as defined in Regulation D and were
acquiring such securities for investment for their own account and not for distribution.
 
 Submission of Matters to a Vote of Security Holders
   Director
    
    For
    
    WithheldDavid R. Asplund
    
    
    45,134,365
    
    
    
    130,710Gregory T. Barnum
    
    
    45,134,433
    
    
    
    130,642William R. Carey
    
    
    44,941,338
    
    
    
    323,737Joseph F. Desmond
    
    
    45,134,462
    
    
    
    130,613Richard P. Kiphart
    
    
    45,130,534
    
    
    
    134,541Daniel W. Parke
    
    
    45,134,478
    
    
    
    130,597Gerald A. Pientka
    
    
    44,937,687
    
    
    
    327,388David W. Valentine
    
    
    45,134,355
    
    
    
    130,720
  31




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##### Table of Contents



Exhibits
 31.1
    
    Certificate of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)
and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certificate of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)
and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Chief Executive Officer of the Corporation Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code Pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    Certification of the Chief Financial Officer of the Corporation Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
 32




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##### Table of Contents



SIGNATURES
  LIME ENERGY CO.:Dated: August 13, 2007
    By:
    /s/ David AsplundDavid AsplundChief Executive Officer (principal executive officer)Dated: August 13, 2007
    By:
    /s/ Jeffrey MistarzJeffrey MistarzChief Financial Officer (principal financial and accounting officer) 33